hw02a_2008 - UNC-Wilmington Department of Economics and...

UNC-Wilmington ECN 321 Department of Economics and Finance Dr. Chris Dumas Homework 2 Solutions 1) What is the definition of economics as discussed in lecture and in the class handouts? Economics is the study of the rational allocation of resources under constraints to meet objectives. 2) What is a theory ? Can anyone ever prove a theory? Why or why not? A theory is a pattern believed to be observed in data. A theory CANNOT be proven because any theory is based on only a limited understanding (limited data, less than full information) of the situation under study. 3) What is a model ? What are the three elements of any model? A model is a formal, precise statement of a theory. The three elements of a model are: variables, parameters and operators. 4) How does Inductive Reasoning differ from Deductive Reasoning ? Inductive Reasoning is the process of finding patterns in data. Inductive Reasoning is used to build a model from data. Inductive reasoning uses the methods of graphing and statistical inference. Deductive reasoning is the process of finding the implications/forecasts/predictions/theorems that come from a model. Deductive reasoning uses the methods of logic and math. 5) What is the ceteris paribus assumption? The ceteris paribus assumption is the modeling assumption that everything in the world outside the model is assumed to remain constant. The ceteris paribus assumption creates a "virtual, conceptual laboratory" within which to examine a model, its operation, and its implications. 6) What is the principle of Ockham's Razor ? Ockham's Razor is a model building principle which states that unimportant details should be "cut away," or discarded, from a model. In practice, applying Ockham's Razor means that a model-builder attempts to create the simplest model that still manages to capture the key aspects of the situation under study. 7) What type of analysis is used to determine the best values for the parameters in a model? Statistical Regression Analysis is typically used to determine the best values for the parameters in a model. 8) How are the operators in a model determined? In mathematical models, operators are the "plus signs, minus signs, multiplication symbols," etc. in the equations of the model. The operators in a model are determined by using Statistical Regression Analysis in a special way called Nested Modeling. 9) Which type of relationship, linear or nonlinear , is more important to correctly identify and analyze when building a model? Explain why in one or two sentences. Although linear relationships are important because they are common, it is almost always more important to correctly identify and analyze nonlinear (rather than linear) relationships in a model, 1

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UNC-Wilmington ECN 321 Department of Economics and Finance Dr. Chris Dumas because nonlinear relationships are most often the cause of surprising model results, such as "exploding" relationships among variables. 10) What is

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